Retail investors are not noise traders

Manapol Ekkayokkaya, Suppasit Jirajaroenying, Christian Wolff 09 January 2019



Much of the literature on investments and investor types labels individual or retail investors as ignorant, uninformed, and trading on noise and sentiment, while viewing institutional investors as sophisticated and informed traders (e.g. Barber and Odean 2008). A number of studies report corroborating findings (e.g. Foucault et al. 2011). Notably, the evidence dubbing retail investors as noise traders is based largely on transactions by clients of a discount brokerage house. Using more extensive datasets, recent studies report informed trading activities by retail investors (e.g. Kelly and Tetlock 2013, 2017). Also, Kelly and Tetlock (2013) point to the possibility that while institutions concentrate on large stocks, retail investors accumulate novel information about small stocks. These emerging insights cast doubt on the far-reaching conclusion that retail investors are noise traders.

A unique dataset for Thailand

In examining comparative trade execution prices between retail and institutional investors, we exploit a proprietary dataset made available to us by the Thai stock exchange (Ekkayokkaya et al. 2017). The Thai stock market is suitable ground for such an examination. It is a fully automated order-driven market with no specialists quoting bid and ask prices. Thus, trades executed on the Thai stock exchange are free from the inventory effect due to specialists’ risk aversion typical in a quote-driven market (such as the New York stock exchange), thereby enabling cleaner inferences about investors’ trading decisions. Moreover, unlike data from an individual brokerage house, this dataset contains all orders and transactions made by all investors in the stock market. This feature allows us to avoid the potential selection biases about the population of traders (for a discussion, see Kelly and Tetlock 2013). Importantly, the dataset also allows us to identify exactly whether a given executed trade is initiated by a retail investor, an institution, or a foreign investor.

Retail investors versus local institutions

We find that local retail investors (henceforth, “retail investors”) generally pay 6.2 basis points less than local institutions when executing purchases, and receive 4.0 basis points more when executing sales. This makes an average roundtrip trade 10.2 basis points more expensive to execute for local institutions than for retail investors. Whether they are buying or selling, this outperformance of retail investors persists across the known investment styles. Moreover, retail investors exhibit a pronounced preference for small-cap stocks, and consistently pay less than local institutions by a larger margin when buying these stocks. This pattern is consistent with retail investors having a comparative advantage in analysing and trading small-cap stocks (Kelly and Tetlock 2013). This evidence of retail investors executing trades at better prices than institutional investors domiciled in the same market cannot be explained by conditions that are likely to put retail investors at a price advantage independently of their trading decisions or skills.

Retail investors versus international institutions

Due to their superior resources and technology, foreign investors, being international investors, are often viewed as more informed about local stocks than even local institutions (e.g. Dvorak 2005). Nevertheless, the debate is far from settled. Our dataset allows us to benchmark retail investors against the investor type that is potentially more sophisticated than local institutions, thereby further assessing retail investors’ trade execution skills. When executing purchases, retail investors persistently underperform foreign investors regardless of investment style. However, the opposite holds when selling. Consistent with their preference for small-cap stocks, retail investors receive larger prices when executing sales which are also by far the largest for these stocks. To the extent that institutions are relatively constrained when selling (Keim and Madhavan 1996), this variation in sale execution performance is in line with the possibility that retail investors have a comparative advantage in analysing small stocks and rationally utilise the greater flexibility they have in executing trades.


Our work joins the growing literature that reports information-based trading by retail investors. We extend the existing insights by examining comparative trade execution prices between retail and institutional investors, and document systematic outperformance of retail investors relative to institutions, especially domestic institutions. We also extend the existing literature by accounting for known investment styles, and find evidence consistent with retail investors having a comparative advantage in analysing and trading stocks in their preferred style. Unlike in the US and several other developed markets, brokerage houses in Thailand are required by law to provide their clients with research services (i.e. analyst reports) at no extra cost, thereby giving all retail investors the opportunity (complementing their incentives) to make information-based trades. Accordingly, our evidence that retail investors execute trades at better prices than institutions in the same market is also in line with the findings of Fong et al. (2014) that when retail investors have access to information, they utilise it and enjoy trading profits. 

In addition, our work contributes to the largely unsettled literature on the information advantage of foreign investors over local investors. The evidence in our study points out that such information advantage may well vary depending on the times at which foreign investors execute purchases and sales of the local stocks.

Despite voluminous research on trading activities of retail and institutional investors, to our knowledge, the fundamental question of which group performs better remains far from clear. One plausible reason for such paucity might lie in the difficulty in making generalisations from a sample of trades by clients of a single brokerage house. Based on trades by all investors in a stock market, our analysis reveals that retail investors execute trades systematically at better prices – i.e. they buy at lower prices and sell at higher prices – than institutions, especially domestic institutions. By taking account of  known investment styles, we also find evidence consistent with retail investors having a comparative advantage in executing trades of small stocks, which provides a plausible rationale for their known preference for small stocks.


Our work corroborates the recent literature that challenges the noise-trader label traditionally attached to retail investors. To the extent that institutional trades demand immediacy, the superior trade execution prices achieved by retail investors which we document are consistent with these investors rationally utilising their trading flexibility and choosing to be on the correct side of trades to gain from supplying liquidity. Moreover, brokerage houses in Thailand are, by law, full-service houses. Accordingly, the evidence in our study raises the possibility that retail investors with ready access to research services can behave differently from those studied in several prior studies (i.e. those who are clients of a discount broker and do not have ready access to such information).


Barber, B M and T Odean (2008), “All that glitters: The effect of attention on the buying behavior of individual and institutional investors”, Review of Financial Studies 21: 785-818.

Dvorak, T (2005), “Do domestic investors have an information advantage? Evidence from Indonesia”, Journal of Finance 60: 817-839.

Ekkayokkaya, M, S Jirajaroenying and C C P Wolff (2017), “Trading in style: Retail investors vs. institutions”, CEPR Working paper 12462.

Fong, K Y L, D R Gallagher and A D Lee (2014) “Individual investors and broker types”, Journal of Financial and Quantitative Analysis 49: 431-451.

Foucault, T, D Sraer and D J Thesmar (2011), “Individual investors and volatility”, Journal of Finance 66: 1369-1406.

Keim, D, and A Madhavan (1996), “The upstairs market for large-block transactions: Analysis and measurement of price effects”, Review of Financial Studies 9: 1-36.

Kelly, E K and P C Tetlock (2013), “How wise are crowds? Insights from retail orders and stock returns”, Journal of Finance 68: 1229-1265.

Kelly, E K and P C Tetlock (2017), “Retail short selling and stock prices”, Review of Financial Studies 30: 801-834.



Topics:  Financial markets

Tags:  retail investors, trading, institutions, noise, Thailand, stock exchange

Associate professor of finance, Chulalongkorn University

Senior Financial Consultant, Kasikornbank

Research Professor at the Luxembourg School of Finance, University of Luxembourg; Research Fellow, CEPR


CEPR Policy Research